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The SEC’s first whistleblower award

Yesterday, the SEC announced its much-anticipated first whistleblower award. The SEC order provides that an unidentified whistleblower will receive 30% of the amount already, and to be, collected in an SEC enforcement action pending in federal court. The SEC order confirms that another, unidentified whistleblower will not receive an award in this matter, despite having filed a claim.

According to the SEC’s press release, the SEC has collected approximately $150,000 of the more than $1 million in sanctions in this case, making the current award approximately $45,000. The SEC’s order provides that any increase in “the sanctions ordered and collected” will increase payments to the whistleblower.

Although the SEC is required to pay awards and is highly motivated to incentivize continued whistle-blowing as well as to reinforce its support of the award program, this announcement confirms a few challenges that whistleblowers face:

It takes time. The SEC did not identify the parties in the litigation or the whistleblower. The Dodd-Frank Act authorized SEC awards in July 2010, and the SEC adopted its rules in May 2011, but the whistleblowing could have begun before either of those events. Absent more information, it is difficult to discern when the whistleblower first contacted the agency, when the alleged violations occurred, how long the investigation took, or when the enforcement action was filed in court. It is clear, however, that the award was not authorized until after all of these steps had occurred, the SEC had actually collected sanctions money, and the SEC ordered the award. In many investigations, that timeline would extend for multiple years.

It takes effort. Enforcement Division Director Robert Khuzami said that the whistleblower “provided exactly the kind of information and cooperation” the Division hoped would occur with the promise of a monetary reward. This likely means a significant time commitment by the whistleblower.

It takes results. According to the SEC’s press release, not only did the whistleblower’s information lead to findings of securities law violations, the Division believes “many more investors” would likely have been harmed if the whistleblower had not helped the SEC “uncover the full dimensions of the scheme.” In contrast, the SEC denied a second claimant any monetary award because “the information provided did not lead to or significantly contribute to the SEC’s enforcement action.”

It takes collections. The SEC’s rules and the Dodd Frank Act provide that a whistleblower award must be based on amounts collected, not amounts awarded. 17 CFR Part 240.21F-5; 15 U.S.C. 78u-6(b)(1). Collections have not been the SEC’s strong suit, according to GAO reports through the years. See U.S. Gov’t Accountability Office, GAO -01-9000, “SEC and CFTC: Most Fines Collected, But Improvements Needed In The Use Of Treasury’s Collection Service” (2001); U.S. Gov’t Accountability Office, GAO-03-795, “SEC and CFTC Fines Follow-Up: Collection Programs Are Improving, But Further Steps Are Warranted” (2003). Here, the winning whistleblower will receive approximately $45,000 (30% of the approximately $150,000 collected, according to the release), but apparently may ultimately receive $300,000 or more, depending on the SEC’s collection success.

The release and order raise many questions, and clarification may emerge over time if more information becomes known about this situation or as other awards are announced. For example, the publicly available information does not confirm whether one or both whistleblowers were employees of a charged entity, and if so, whether they alerted their employer to their concerns. Whether a whistleblower alerted his or her employer is a factor that the SEC must consider in determining the award, at least if the whistleblower was an employee of the relevant entity at the time he or she contacted the SEC Staff. See 17 CFR Part 240.21F-6(a)(4) (requiring the SEC to “assess whether, and the extent to which, the whistleblower participated in internal compliance systems” in determining the amount of the whistleblower’s award). The factors the SEC actually considered in determining the award percentage also remain unclear, although glowing compliments in the SEC’s press release suggest that the value of the cooperation to the SEC’s investigation contributed to the SEC’s determination to award the highest possible percentage of collections, 30%, rather than another percentage within the 10-30% range authorized by the Dodd Frank Act.

Over time, perhaps these and other issues may be clarified. For now, it seems clear that the SEC’s program is working, and despite the challenges inherent in the process, whistleblowers are making greater attempts to help the agency uncover and address securities law violations. This first award foreshadows many more to come, as the SEC continues to confirm publicly the high quality of many tips and the significant volume it receives, averaging approximately eight tips each day.

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